MGTO 231 Human Resources Management

1
MGTO 231Human Resources Management

• Compensation II
• Dr. Kin Fai Ellick WONG

2
Outline

• Designing a compensation system
• Egalitarianism vs. elitism
• Below market vs. above market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decision
• Compensation tools
• Job-based compensation plans
• Skill-based compensation plans

3
Outline

• Designing a compensation system
• Egalitarianism vs. elitism
• Below market vs. above market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decision
• Compensation tools
• Job-based compensation plans
• Skill-based compensation plans

4
Nine criteria for developing a compensation system

• Internal vs. external equity
• Fixed vs. variable pay
• Performance vs. membership
• Job vs. individual pay
• Egalitarianism vs. elitism
• Below-market vs. above-market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decisions

5
Nine criteria for developing a compensation system

• Internal vs. external equity
• Fixed vs. variable pay
• Performance vs. membership
• Job vs. individual pay
• Egalitarianism vs. elitism
• Below-market vs. above-market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decisions

6
Egalitarianism vs. Elitism

• Egalitarian pay system
• A pay plan in which most employees are part of
  the same compensation system
• Reduces barriers between people as the hierarchy
  is relatively fuzzy

7

• Elitist pay system
• A pay plan in which different compensations are
  established for employees or groups at different
  organizational levels
• Different pay systems may create a sense of
  hierarchy
• Encourage employees to move upward

8
Nine criteria for developing a compensation system

• Internal vs. external equity
• Fixed vs. variable pay
• Performance vs. membership
• Job vs. individual pay
• Egalitarianism vs. elitism
• Below-market vs. above-market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decisions

9
Below-market vs. above-market compensation

• Below market
• Less expensive
• Low job satisfaction and high turnover
• Employees with high ability will not stay long,
  or even will not apply
• Above market
• More expensive
• Employees are relatively stable
• Can attract competent candidates

10

• Trade-off between attractiveness and costs
• A possible solution
• Above-market compensation for important posts
• Below-market compensation for less important
  posts
• ???? (make an average)

11
Nine criteria for developing a compensation system

• Internal vs. external equity
• Fixed vs. variable pay
• Performance vs. membership
• Job vs. individual pay
• Egalitarianism vs. elitism
• Below-market vs. above-market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decisions

12
Monetary vs. non-monetary rewards

• Monetary rewards
• Money, cash, or payment that can be converted
  into cash in the future (stocks, retirement plan)
• Non-monetary rewards
• Interesting work, challenging assignments, public
  recognition, degree of freedom

13

• Extrinsic vs. intrinsic motivation
• Extrinsic motivation
• Behaviors are motivated in order to get external
  rewards, e.g., cash
• Low in job satisfaction
• Intrinsic motivation
• Behaviors are motivated in order to get
  self-fulfillment
• High in job satisfaction
• A story about a professor vs. a band

14
Nine criteria for developing a compensation system

• Internal vs. external equity
• Fixed vs. variable pay
• Performance vs. membership
• Job vs. individual pay
• Egalitarianism vs. elitism
• Below-market vs. above-market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decisions

15
Open vs. secret pay

• Open pay
• Salary can be accessed by public (or most of the
  employees in the same firm)
• Civil servants, professors, etc.
• Secret pay
• Salary of each employee should not be disclosed
• Those who break this rule may be fired

16
Advantages of open pay

• Increase employees satisfaction as they tend to
  overestimate others salaries
• Open pay is perceived to be more fair as it is
  perceived that no hidden decision occurs

17
Disadvantages of open pay

• It forces the managers or supervisors to expend
  more resources (time, writing report) to justify
  their decisions
• The cost of mistake in decision increases
• This system tends to minimize salary differences
  across employees ? increases turnover rate and
  decreases job satisfaction for those who have
  best performances

18
Nine criteria for developing a compensation system

• Internal vs. external equity
• Fixed vs. variable pay
• Performance vs. membership
• Job vs. individual pay
• Egalitarianism vs. elitism
• Below-market vs. above-market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decisions

19
Centralized vs. decentralized

• Centralized system
• Pay decisions are tightly controlled in a central
  location, normally the HR department
• Decentralized system
• Pay decisions are delegated deep down into the
  firm, normally to managers of each unit

20
Centralized system is more appropriate when

• It is cost effective and efficient to hire
  compensation specialists, who are responsible for
  salary surveys, benefits administration, and
  recordkeeping.
• There are frequent legal challenges
• The company wants to have more control on expenses

21
Disadvantages of centralized

• The issue of external equity (thats why a
  specialist is so important)
• It lacks flexibility, department cannot offer a
  more attractive package for an excellent candidate

22
Outline

• Designing a compensation system
• Egalitarianism vs. elitism
• Below market vs. above market compensation
• Monetary vs. non-monetary rewards
• Open vs. secret pay
• Centralized vs. decentralized of pay decision
• Compensation tools
• Job-based compensation plans
• Skill-based compensation plans

23
Job-based compensation plans

• Achieving internal equity
• Achieving external equity
• Achieving individual equity

24
Achieving internal equity

• Job evaluation by job analysis
• Job description and job specifications
• Rate worth of all jobs
• Using a predetermined system
• Compensable factors work-related criteria that
  an organization considers most important in
  assessing the relative value of different jobs
• Knowledge, effort, responsibility, job conditions

25

• Create a job hierarchy
• Classify jobs by grade levels

26
Achieving external equity

• Do market survey
• ???????? (salary trend index)
• Identifying benchmark or key jobs
• Jobs that are similar or comparable in content
  across firms
• Establishing a pay policy
• A firms decision to pay above, below, or the
  market rate for its jobs

27
Achieving individual equity

• Individual equity
• The perceived fairness of individual pay
  decisions
• Simply assign each employee a pay rate within the
  range established for his or her job
• Assuming that this jobs salary has achieved both
  internal and external equity, then individual
  equity will also be achieved

28
Skill-based compensation plans

• It is more costly and more limited in use
• Three dimensions are paid
• ?Depth of skills (learning more about a
  specialized area)
• ?horizontal or breadth of skills (learning more
  about more areas)
• ??vertical skills (self-management)

29

• Depth of skills
• Typist
• 100 wpm vs. 120 wpm
• Basketball player
• Field goal percentage
• 45 vs. 20
• Programmer
• Knowledge in C

30

• Breadth of skills
• Typist
• Typing accounting photocopy machine
  maintenance
• Basketball player
• Free-throw 3-point assistant
• Programmer
• C Java Visual Basic Pascal